Responsible Investment works and is a good way to cement a relationship with clients, says Philippa Yelland.
If the Global Financial Crisis (GFC) made you stop and think about how you’re engaging with clients and how to manage your business, you may also want to look at responsible investment (RI) – the RI sector not only survived the upheaval but also has emerged to outperform the mainstream investment market.
The latest performance data published by the Responsible Investment Association Australasia (RIAA) shows that, to the end of 2009, responsible investments delivered above-average returns for almost all periods from one to seven years.
These results are proof that RI can deliver strong and sustainable returns, even through the toughest global financial circumstances experienced in more than 80 years.
“At its core, responsible investment is a prudent investment strategy,” says Louise O’Halloran, executive director of the Responsible Investment Association Australasia (RIAA), the peak body for RI in Australia and New Zealand.
“Its objective is to help investors make better investment choices and maximise their returns by incorporating important environmental, social and governance (ESG) issues into the evaluation process.”
Excellent performance is just one reason why there is a global groundswell of participation in RI. Increasingly investors are turning to RI out of disappointment in traditional investment management and in the hope of tapping into opportunities associated with new environmental and social paradigms.
In a social media research report completed late 2009 by Our Religion, a digital new media company, and commissioned by RIAA, it was found that there were nearly 10 billion individual English-speaking items related to responsible investment. A lack of trust in large financial institutions created by the GFC was a prime reason people gave for actively looking for investment products and services that embed sustainable and responsible attributes in addition to traditional financial concerns.
“These report findings echo those uncovered by RIAA when we surveyed a number of our financial adviser members in mid-2009,” says O’Halloran. When asked why clients elect to invest all or some of their money in accordance with responsible investment principles, the most frequently cited reasons for investing responsibly were:
• It offers competitive and sustainable returns while making a positive contribution to the world.
• If you care about the environment and climate change, it is one way you can seek to make a difference.
• It can channel funds to companies that take a positive position on important environmental, social and governance issues and demand greater accountability.
• It provides a way to “cast your vote” about the environmental, social or ethical issues that are important to you.
High net worth (HNW) investors are a group increasingly turning to responsible investment to gain an edge. The fifth annual Wealth and Values Survey by the PNC Financial Services Group (2009), found that most wealthy Americans (who have at least US$500,000 in investable assets) have “green” values, reporting a keen interest in environmental issues and companies that follow a socially responsible path.
This survey revealed that “71 per cent have socially responsible and green investments in their portfolio, while 57 per cent say they have up to 25 per cent of their portfolio in such investments, and 9 per cent have between 25 and 50 per cent”.
But before you race out and start talking with your clients about responsible investment, listen to a word of warning offered in the EIRIS and Tru-Est Special Report in 2008, called “Wealth Managers and SRI”. This report found that the single largest factor impeding the growth of responsible investment was not lack of willingness from clients, but rather that advisers do not have the knowledge they need to address these issues with confidence.
The report found that often advisers had educated themselves about RI in reaction to client requests and that this had led to an ad hoc understanding about specialist products and how ESG issues can affect portfolio value.
There’s no need for advisers in Australia to find themselves in this situation. Those keen to tap into this growth market can make a start by completing an online course in RI. Designed by RIAA, this course provides a comprehensive overview of the sector, insights into why clients choose RI, how to integrate these reasons into portfolio construction, and how to introduce RI into a practice.
Responsible investment clients are known to be more “sticky” than their mainstream counterparts, meaning that they will stick with their investments even when times get tough, because they have a long-term commitment to the strategy that reaches well beyond short-term financial returns.
This provides advisers with a golden opportunity to better serve the client’s real needs, to engender trust and to promote loyalty and word of mouth recommendations.